Is Congress Creating Another Housing Bubble?
Economists agree that the home-buyer tax credit is risky and stupid. So why does Washington love the policy?
Though the deeply divided Congress can't seem to agree on much these days, the House and Senate did manage to come together this week, with nearly unanimous votes, to extend an $8,000 first-time home-buyer tax credit. But among economists of various political persuasions, there's widespread agreement on the Obama-backed bill: It's a horrible policy that could wind up prolonging, if not worsening, the housing crisis.
"When governments at the state and local level are cutting back funding for everything from preschool education to nursing home care, the federal government is sending $8,000 checks" to home buyers who don't need assistance, says Dean Baker, the codirector of the Center for Economic and Policy Research. "It might be possible to develop a more warped economic policy, but it would not be easy." Mark Calabria, the director of financial regulation studies at the libertarian Cato Institute and a former Republican staffer on the Senate banking committee, agrees. "This is something where despite bipartisan opposition to it from experts, there seems to be massive bipartisan support for it on Capitol Hill," he says.
Ted Gayer of the centrist Brookings Institute issued what one CNN blogger described as a "smackdown" of the credit. Simon Johnson, the former chief economist of the International Monetary Fund, and James Kwak, who writes a Washington Post column with Johnson, have called the credit "throwing good money after bad." And conservatives—Kevin Hassett, the director of economic policy studies at the conservative American Enterprise Institute, and Ronald Utt, a senior research fellow at the Heritage Foundation, have penned pieces slamming the home-buyer credit. Even the Obama-aligned Center for American Progress got in the act; Andrew Jakabovics, the think tank's associate director for housing and economics, criticized the credit's extension on National Public Radio.
So why is a policy that diverse experts think is a bad idea so popular in Washington?
"Never underestimate the massive amount of political pull that the real estate industry and the home builders have," Calabria says. The real estate industry gave $136 million to federal candidates during the 2008 election cycle, putting it fourth overall in terms of campaign contributions. The industry also spent nearly $750 million lobbying the federal government over the past two decades, $81 million of that in 2008 alone.
The biggest problem with the tax credit, economists say, is that it could well reinflate the housing bubble that helped cause the financial crisis. The tax credit is taking taxpayer money—likely more than $45 billion of it, according to the Brookings Institution—and redistributing it to buyers and sellers of homes. "We are prolonging the adjustment of the housing market," Calabria says. Baker agrees: "There's an implicit assumption that we want to prop up the housing market, and I'm not sure that's what we want to do." He questions why home buyers deserve the handout: "Do we think we should give someone $8,000 because they bought a pizza?" He also argues that home buyers are generally middle-class, and that the credit does next to nothing for the working poor. For $8,000, Baker notes, you could pay for health care for two children under the State Children's Health Insurance Program: "There are lots of other things you could do with the money."
Calabria and Baker both say that renters are getting an especially raw deal in this legislation. Calabria notes that the tax credit is the continuation of a "very large bias" in our federal policies toward home ownership. But in the wake of a foreclosure-fueled financial crisis, Washington's continuing slant toward home owners deserves questioning. "Clearly you cannot continue with a straight face and go around saying housing is the absolute best investment for households," he says.
In theory, the first-time home-buyer tax credit, which was first passed after Sen. Johnny Isakson (R-Ga.) added it to the Democrats' stimulus package, is supposed to stimulate the economy by encouraging people to buy homes. But most people who have received the credit so far were going to buy homes anyway. The National Association of Realtors estimates that only one in five people who received the credit bought a home because of it. This means that the actual cost of the bill is north of $40,000 for each "stimulated" home purchase.
Why does Washington work this way? Calabria has a theory. "I spent seven years working in the Senate and I can say that there is an utter lack of basic economics," he says. "I'm not talking about radical free-market stuff—just the 90 percent of stuff that Paul Krugman and I would agree on."
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economic stupidity
The question of why they would do it is painfully obvious, as it is also the reason social security, medicare and medicaid (and soon obama care) exist: it's called VOTE BUYING
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Housing Bubble?
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How about a new government agency that would guarantee that house prices would not fall below the price paid for the house. I would call this new agency the Home Value Guarantee Corp. and it would insure that the value of all houses would not fall below the price paid at the last sale during the last 5 years. If there had not been a sale , the price would be determined by average sales prices of similar homes in the area during the highest point of the last 5 years. If someone sells their home for less than the guaranteed value, they get a check from the federal Government. this would be a bailout for the little guy and end worries about the value of one's house. Would also make it easier to get a home equity loan and easier to sell homes. Now wouldn't this be a nice thing. Also think of the medical cost that would be saved by eliminating that nagging question from every house owner's mind: "what's my house worth?"
Such a home value insurance
Such a home value insurance program would lead to a lot of run-down houses. Think of the number of people that would decide to sell right around the time it becomes necessary to put on a new roof or tackle some other major project. Or you could run the home into the ground and then get the same money back subsidized by who?
Basic economics.
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A lot of negative comments
A lot of negative comments about this, but it would be great for my family.
We did not buy into the pay 500grand for a 3 bed room house in the valley crap.
The old market was based on greed. Now the economy is paying the price.
We waited it out, and rented.. now we are about to buy our first home.
The tax credit would be just fine for us.
Single payer housing
How about single payer housing.
is this "the onion?"
this article is funnier than some Onion articles.
what's that you say? this is actually happenning? it's not fake news?
oh.
then this is not funny.
How to make houses affordable
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You are not going to believe this -- but it is a FACT -- see http://www.primeronmoney.com
When a bank lends you money to buy a house -- that money is created instantly -- just for you.
The money is given to the bank by the Federal Reserve at no charge -- no interest. All the interest is pure profit to the bank
The bank, of course, charges you interest of at least 5%. That interest will double the cost of the house for you.
Can anyone explain how banks justify those interest charges? The only work involved is cashing your checks -- after you have paid all the closing charges including the cost of the bank checking your ability to repay the loan.
Our solution is that mortgage loans should be capped by statute at 2%
It looks like the government would rather give new buyers an 8% gift than reduce the price of the house by about 50% by pushing interest rates back to 2%
Martin R. Carbone -- 11/09/09
greed
greed gives way to... more greed. in time. yes, there will be another bubble and yes we will repeat the mistakes again. why wouldn't we? the people who missed out on the last party will want their share the next time around. no question about it! Kim
This spamful site needs
This spamful site needs editorial control.
WGAF?
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In the same spirit that inspires Watts and Katrina-style looting, defense contractor profiteering, Chicago cops with sticky fingers, and the recent shift of trillions? in current and future wealth from "us" to Wall Street bankers, I suggest you borrow a phrase from the Urban Dictionary and "get mines."
It's "us against them" (the last stop before "every man for himself"), folks.
Obviously Cash for Clunkers and "Dollars for Dumps" isn't smart economic policy, and it's certainly not the free market at work (unless you throw out all principles and consider politics and votes no more than currency). Paying perfectly good money to crush perfectly good cars with marginal (at best) environmental benefits didn't make sense. The government could have purchased all the cars to be donated to Afghan and Iraqi civilians at least. We could try to hook them on their own drug (oil) and one of ours (American iron & parts).
And yes, I think Dollars for Dumps is artificially propping up prices, at least here in Florida. Most folks I know who are shopping are looking to cash in on the credit. The others are investors dollar averaging down on the real estate portfolio.
I disagree with the idea that only 1 in 5 home purchases is tied to the credit. Any "stats" or "estimates" from the National Association of Realtors should be viewed as on par with the opinion of your cabbie. Actually, no - lower; the cabbie is probably being honest. The NAR has reason to play down the significance of the credit because "the market is turning around, see?" Track down their press releases from the last decade and read them. Delusional.
If everyone else in the house is stealing handfuls of cookies from the cookie jar, are you going to sit by and refuse a few crumbs out of principle?
The hangover from these artificial market highs sucks, doesn't it? But maybe, just maybe, we can pump the bubble back up enough, get everyone feeling just high enough not to feel the pain, and some of us the middle class who are trapped in our houses by underwater values can find a greater fool to free us from this blessing of home ownership (and who gives a damn who pays for it down the road?). Then we can either rent or take our table winnings and leave the country.
There's a great blog about all this stuff by a friend of mine, Whitney Ross. You can find it here:
http://theaffordablemortgagedepression.com/2009/10/15/what-is-your-house...
MoJo, your mag ia awesome but your comment feature is not (how about a "flag as spam" button? Use Delicious to track it and hire an intern to delete it.
Deflation will win out
While they prattle on about "affordable housing" they waste money trying to prevent an inevitable further price collapse.
The FED/Treasury are desperate to avoid the re-pricing of assets downward until the banks can build Trillions in reserves (the reason they do not lend the Billions handed to them) to preserve the large banks.
Trillions in losses still reside off-book at JPM, BAC, Goldman etc.
These losses WILL be taken, just a question of when and by whom.
The Bankers and politicians want US to pay the bill.
I live in an area of the
I live in an area of the country where we didn't have a housing bubble. Home prices have deflated a little, but not much. And it's only because people are worried about the economy. I just bought a house that I wouldn't have been able to buy otherwise. Do I feel bad about it? No. How is getting a tax credit for buying a house any different than homeowners getting to deduct interest and other things? Taxes redistribute money. That's their purpose. Get over it. For years, my taxes have been used to give rich people tax deductions. I accept that. Now that I'm a homeowner, I get a little of that back.
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